Tuesday, November 05, 2013

The organised criminal London financial market - A Political resignation issue!

A series of recent revelations, not necessarily
individually dramatic in themselves, but taken as a whole, begin to define a
completely new interpretation of the level of criminality which has infected
the financial markets.

The financial crisis opened a Pandora's box of
troubles, and among them was the emerging realisation that market practitioners
may have been engaging in certain activities, which when viewed through a
cynical perspective, might have been construed as criminal.

As more and more facts emerged, it became
clearer that what at first might have been called a cynical perspective, was
rapidly becoming the only realistic interpretation of the situation. The most
important financial markets had become a byword for organised criminality,
operated by a gang of men and women to whom the concept of truth and fair
dealing had long since ceased to have any meaning.

As each case was uncovered, the more it became
obvious that the financial markets were being operated by a group of organised
criminal groups, men and women who had formed a series of interlinking social
networking, web-driven, communications venues, and who have been using each
other to generate financial situations from which one side or other, or indeed,
mutually, could profit.

The interesting observation was that in many
cases, these market practitioners were working in different financial houses,
yet they all appeared to know each other well. To a great extent, we should not
be surprised, these markets are small, and local, and the players in this
criminal game know each other very well. It pays to make good contacts with
others of a similar 'bent', when you set out to manipulate a market, you never
know when you may need them!

What is emerging is a recognition that these
financial markets have been irresistibly infiltrated by organised criminals -
the very phenomenon which we have fought to avoid for so many years, has
finally become the reality.

Floyd Norris, who writes the High & Low
Finance column for the Friday Business section of the New York Times, has
covered the LIBOR scandal in great detail. His words are scarily percipient.

"...The LIBOR market, we now
know, was a fraud. There were few — if any — real trades backing the indicator.

A Reuters report states that U.S. and European
regulators have fined Dutch lender Rabobank $1 billion (623 million pounds) for
rigging benchmark interest rates, making it the fifth bank punished in a
scandal that has helped to shred faith in the industry.

Rabobank said on Tuesday it would pay 774
million euros to U.S., British and Dutch regulators after 30 staff were
involved in "inappropriate conduct" a scam to manipulate the London Interbank
Offered Rate (Libor) and its Euribor cousin - benchmarks for more than $300
trillion of financial assets

Chief Executive Piet Moerland resigned, saying
he was shocked by language revealed in emails exchanged by staff involved over
six years to 2011. He acknowledged it would arouse indignation, both within an
institution founded as a cooperative and among the public at large.

"Such behaviour is entirely contrary to
our core values, of which integrity is the most important," he said.

The scandal surrounding the interbank rates
that underpin the demands of global finance has prompted authorities to fine
five institutions $3.7 billion to date. They have also charged seven men with
criminal offences amid a sprawling, global inquiry that has laid bare the
failings of regulators and bank bosses.

Dutch Finance Minister Jeroen Dijsselbloem said
Rabobank's "shameless fraud by financiers" was far removed from the
cooperative ideals of the lender's founders.

Germany's Deutsche Bank, has yet to reach any regulatory
settlements.

Deutsche, Germany's largest bank, set aside an
extra 1.2 billion euros on Tuesday to deal with potential litigation costs,
while UBS in Switzerland was told to hold extra capital to cover looming
liabilities.

In March 2011, Rabobank had told the British
regulator its Libor-related systems and controls were "fit for
purpose".

The FCA said it had found over 500 instances of
attempted Libor manipulation, directly or indirectly, involving at least nine
managers and 19 other individuals based across the world.

"Rabobank's misconduct is among the most
serious we have identified on Libor," said Tracey McDermott, head of
financial crime at the FCA. "This is unacceptable." ( Well, that's
one way of putting it, I suppose! Ed.)

The U.S. Justice Department agreed to defer
criminal charges against Rabobank for two years, and drop charges if the lender
complied with demands to cooperate in investigations.

Although it said no executive board members had
been aware of or involved in the misconduct, the board had voluntarily forfeited
remuneration worth a total of 2 million euros.

UBS has faced the largest Libor penalty to
date. It was ordered to pay $1.5 billion last December and two of its former
traders have been charged with taking part in an alleged multi-year scheme to
rig rates.

"I wish I could say that this won't happen
again, but I can't," noted Gary Gensler, the chairman of the U.S.
Commodity Futures Trading Commission (CFTC). "Libor and Euribor are not
sufficiently anchored in observable transactions.

"Thus, they are basically more akin to
fiction than fact."

Rabobank has showed just how international a
fraud this was. The authorities said the fraud was carried out by more than two
dozen traders and managers at the bank’s offices in London, New York, Utrecht,
Tokyo, Singapore and Hong Kong. The bank’s chairman resigned.

Such a huge market created ample incentives to
cheat. Sometimes traders wanted to influence the rate so that their derivatives
positions would benefit. Other times banks knew that a lot of loans they had
made had interest rates that would reset on a certain day, based on a
particular Libor rate. Then they wanted to push that rate up, if only for one
day.

At Rabobank, the people who submitted the Libor
number each day were not even trained to determine what the real market rate
was. If there was no request from someone at the bank to push rates up or down,
the submitters were told to just repeat the previous day’s number.

The Libor scandal has now prompted regulators
to scrutinise benchmarks across other financial markets, from crude oil and
swaps and gold to the $5.3 trillion-a-day foreign exchange market, in an effort
to stamp out misconduct. Citigroup and JP Morgan confirmed they were working
with regulators, while Barclays
has suspended six traders amid yet another regulatory probe into
possible rigging of the foreign exchange market.

Barclays, which is still punch-drunk from a
£290million fine for its part in the Libor rigging controversy, is understood
to have taken action after being contacted by regulators.

Barclays has reportedly suspended six traders
as part of an internal investigation into alleged price fixing within foreign
exchange markets. The bank suspended the group, which includes its chief
currency trader, in the last 24 hours, according to a report by
the Financial Times.

None are thought to have been formally accused
of wrongdoing.

In its Q3 results, released on Wednesday, the
bank said it is co-operating with the regulator in regards to its foreign
exchange trading activities.

"The investigations appear to involve
multiple market participants in various countries. Barclays Bank has received
enquiries from certain of these authorities related to their particular
investigations, is reviewing its foreign exchange trading covering a several
year period through August 2013 and is cooperating with the relevant
authorities in their investigations.

According to the Bank for International
Settlements, global foreign exchange activity rose to £3.3 trillion a day this
year. Perhaps not surprisingly, London accounts for the bulk of currency
trading, with 41% of global turnover in the market, followed by the United
States, which has a 19% share, Singapore with 5.7%, Japan with 5.6% and Hong
Kong with 4.1%.

Royal Bank of Scotland is also believed to
have suspended two traders as part of the investigation, news which came
as US banking giants Citigroup and JP Morgan confirmed they were working with
regulators as the global probe deepened, and now, HSBC have confirmed that some
of their former employees (no longer employed at the bank) have been identified
in an investigation.

Both Barclays and RBS declined to comment on
the suspensions, but have confirmed they have been drawn into the investigations.
Barclays said alongside its trading update on Thursday that it was also
co-operating with enquiries from various authorities and was reviewing its
foreign exchange trading activities, over a period of several years to August
this year.

It first emerged in June this year that regulators
were looking into allegations that City traders had rigged foreign exchange
rates to boost profits.

Interestingly, the allegations are believed to
involve traders tipping off friends at other banks about foreign exchange deals
they were about to make, allowing the other firm to benefit by buying currency
at the original price, before the big purchase pushed the price up in the
market, a practice known as “front running”, pushing through trades before and
during a one minute post-trade window.

RBS said in its third quarter results yesterday
that it had been contacted by the UK’s Financial Conduct Authority and other
authorities. “The group is reviewing
communications and procedures relating to certain currency exchange benchmark
rates as well as foreign exchange trading activity and is cooperating with
these investigations. At this stage, the group cannot estimate reliably what
effect, if any, the outcome of the investigation may have on the group.”

Ross McEwan, RBS chief executive, refused to
comment on the case, but said it will “come down very severely on anyone we
discover has been breaking the rules”.

What all this frenzied regulatory information
requesting and these related investigations reveal, more clearly than any
findings may later be allowed to demonstrate, is that the world's financial
benchmark markets have been controlled and managed by organised criminal
elements for many years.

The very fact that these traders can behave in
a way which demonstrates such inter-related conduct, coupled with such a
cavalier disregard for the possible outcomes of their activity, identifies a
level of criminal dysfunction which has developed far and beyond the reach of
any regulatory imagination.

These markets have been allowed to get to these
criminogenic dimensions because their practitioners have operated in an
atmosphere of regulatory anomie - as far as they were concerned, there were no
rules - because that is the message that years of regulatory neglect and
failure has inculcated.

I have been a regulator, back in the early days.
I know how hard it is to go after the big players and enforce your will on
them, but it has got to be done, and they have to be brought to heel. Otherwise
they will know that you can't walk the talk, and they will just ignore your
worst threats, and carry on flouting all the rules.

This is the climate of 'anything goes' which is
inevitably created when the worst that can happen to a bank, even after the
most egregious criminal conduct is identified, is that it gets a fine. The
regulators do not and never have understood that fines, no matter how big, are
simply not an effective punishment. The banks don't care about them, because
they always fall on the shoulders of the shareholders, and as long as no-one in
senior management gets called to account, and stuck in the dock, then nothing
will ever happen.

Oh a few small traders will be relocated to
other houses and fitted in to other teams and allowed to carry on trading, and
after that, it's business as usual!

How can the UK Government continue to insouciantly
maintain that everything in the regulatory
garden is rosy and that all is for the best in the best of all possible worlds?
Maintaining this fiction is the worst kind of complicity! It tells the markets
what they want to hear!

These markets have lost any credibility they
might ever have hoped to possess. Why would anyone be willing to put their
savings into this mafia-run sink, in the hope that they might get something in
return? These are among the most important markets in the world, and if these
are run by the crims, then what hope do the rest of us have.

This is such a serious problem and the
potential for the investment markets so severe, that I believe it has now
reached the stage where it is a political resignation issue. Ultimately, these
markets are regulated by agencies, but in the UK, those financial agencies all
have to answer to the Treasury, and if George Osborne cannot demonstrate that
he has the guts and the clout to kick the crooks out of these benchmark
markets, then he had better resign, and let someone else in to do the job.

I am terribly serious about this. Osborne will
know what is being alleged in these markets, and he will know that the vast
bulk of this dirty, shoddy business is being run through London. He needs to
grab hold of Boris Johnson, who is so keen on trumpeting the integrity of the London
Markets, and the DoPP, and the SFO and tell them that they have got to put a
halt to this climate of crime, once and for all, whatever it takes.

It means that heads are going to have to roll
in EC3, some firms will have to go the wall, but the Politicians have got to
demonstrate some guts to put an end to this shameless criminality.

They have got to be made to realise that they
are paying the price for years of regulatory shilly-shallying, for cosy
regulatory capture, while the chaps at the top of the gilded pile took it in
turns to regulate their mates, in a cosy cabal which sent all the wrong
messages to the spivs and wide-boys on the trading floors.

If they can't do the job, then they had better
get out of the way and let the Americans take over and do it, because my
contacts in the USA tell me that the US regulatory agencies are simmering with
regulatory indignation, and are looking for scalps.

When announcing the CFTC’s enforcement action
that requires UBS to pay a $700 million penalty for unlawful conduct related to
LIBOR, Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler made
the following simple statement;

“...Falsely reported LIBOR and other benchmark
rates undermine the integrity of markets and shake the public’s trust in our
financial system. These rates are at the absolute core of our economy. Banks
must not falsely report rates to protect their reputation, or try to manipulate
benchmarks to increase trading profits.

“Regrettably, with the announcement today of
the CFTC findings against UBS, we have yet another blatant example of what bad
actors can do when a benchmark rate's underlying market becomes virtually
nonexistent.

“I believe that to ensure that a benchmark rate
is reliable and has integrity, it should be anchored in real, observable
transactions. When a benchmark is separated from real transactions, it is
vulnerable to misconduct.

“Benchmark rates should be an honest reflection
of market prices. Whether taking out a student loan, a small business loan or a
mortgage, or putting savings in a money market fund, the American public
depends on the honesty of benchmark rates.

“The CFTC will continue to use vigorously our
enforcement and regulatory authorities to protect the public, promote market
integrity and ensure that these rates are free of false information and
manipulation.

“We are committed to the ongoing international
efforts to develop benchmark rates that best serve the public as honest and
reliable reflections of the underlying markets to which they refer..."

4 comments:

Another 'goodie' Rowan; this one containing some astounding comments including this one: "The U.S. Justice Department agreed to defer criminal charges against Rabobank for two years, and drop charges if the lender complied with demands to cooperate in investigations.Although it said no executive board members had been aware of or involved in the misconduct, the board had voluntarily forfeited remuneration worth a total of 2 million euros." It beggars belief that management didn't know and it is unacceptable. The internal management reports would have clearly indicated performance that could not have occurred in 'the normal course' of business. Management's failure to detect where the profits were coming from is in short, not credible. Yet still no prosecutions. As someone who spends a significant amount of time poring over management reports at law firms the identification of aberrant behaviour is not especially. difficult. The identification of the causes of changes is straightforward if somewhat forensic. The inference from your blog is that so far no one has been through the management reports. That can only be described as negligent. I can't see how this will ever be rectified unless a major political party goes into bat now and states that it will ensure the regulators are prosecuted if they have failed to detect or ignored criminal activity.Ashley

About Me

Having spent my career dealing with financial crime, both as a Met detective and as a legal consultant, I now spend my time working with financial institutions advising them on the best way to provide compliance with the plethora of conflicting regulations and laws designed to prevent and forestall money laundering - whatever that might be! This blog aims to provide a venue for discussion on these and aligned issues, because most of these subjects are so surrounded by disinformation and downright intellectual dishonesty, an alternative mouthpiece is predicated. Please share your views with what is published here from time to time!